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Bruce Kastings has an interesting theory about MF Global. Essentially, once MF Global started commingling customer funds with the rest of their money, all those customer funds became susceptible to margin calls and cash grabs by MF Global’s counterparties. But which counterparty was it who grabbed that money and is now sitting on MF Global’s customer funds?

My guess is that the missing cash was grabbed by one (or more) of the big players in the global bond market. MF did not sign off on the cash grab. The banks moved on them and their customer accounts. MF had no say in the matter.

Given Corzine’s relationship with Goldman I put them high on the list of probable plug pulling bankers. Nomura was a place to go to finance AAA sovereign positions. One of the French or German banks could have been the warehouse for MF’s sovereign exposure. It wouldn’t surprise me if any one of them pulled the plug on the leveraged bets.

MF Global, which had been a primary dealer, recently came under stress and ultimately a trustee was appointed pursuant to the Securities Investor Protection Act to liquidate the business. During this time, the Federal Reserve Bank of New York (the Bank) took progressive and proportionate steps to manage its exposure to the firm and ensure the ongoing effective implementation of monetary policy through open market operations.

The Bank ceased doing new business with MF Global and required the firm to post margin in respect of its $950 million outstanding agency MBS forward transactions with the Bank. The margin protected the Bank against potential exposure to MF Global due to fluctuations in the market value of the positions…

These measures were taken to protect the public interest and minimize risk to taxpayers, and under the framework of the primary dealer policy. The Federal Reserve did not suffer any loss as a result of the firm’s failure.

MF Global’s $950 million exposure to the NY Fed is much bigger than the $630 million of missing MF Global customer funds. Money’s fungible, of course, I’m sure that other banks seized MF Global funds as well, and we have no idea how big the Fed’s margin call was. And as Kastings says, “all of the big players talk when they are moving on collateral and closing relationships with financial firms. When the SHTF, they act as one.” But it’s entirely plausible that the cash grab by the NY Fed was a key move in the spectacular demise of MF Global.

Update: I’m now informed that the size of the Fed’s margin call was closer to $3 million than to $950 million: that is, the margin was designed to cover losses incurred in replacing the trade — which it did — rather than cover the gross size of the trade itself. So the Fed’s margin call didn’t cause the failure of MF Global. But it could still be symptomatic of what happened: a capital-markets counterparty seizing commingled funds. Pace Kastings, I’m sure there were many others.

Update 2: The New York Fed’s communications chief, Krishna Guha, confirms in a statement that “the amount of margin was calibrated based on the potential cost of replacing the trades, not the gross size of the trades.”